The Coming Boom In India-Africa Mineral Investment

India | Mining | Tue Jan 01, 2013

BMI View : We expect a swathe of Indian companies to venture overseas in the pursuit of copper, coal and iron ore as the economy experiences rapid growth and regulation restricts domestic investment opportunities. We expect Africa to become the key destination for Indian mineral sector investment as the continent is rich in high-grade untapped reserves that India will need as the economy grows.

In line with our expectations, chronic power shortages and adomestic shortfall in coal productioncombined with significant regulationhaveencouraged an increasing number of Indiancompanies toventure abroadin search of mining opportunities.Companies such as Coal India Limited (CIL), Vedanta Resources and Tata Power have continued to hunt for investment opportunities in other countries as they seek to plug thegrowingdeficienciesofkey minerals, most notably coal, copper, tin andiron ore.State-runCILhas recently proposed the signing of a memorandum of understanding with the South African government in a bid to establish a wholly-owned subsidiaryfor the development of coal mines. Despiteholding the largest extractable coal reserves in the world, at approximately 22bnt (billion tonnes), the company has struggled toboost output due to failure in obtaining the necessary environment and regulatory clearances.

The Coming Boom In India-Africa Mineral Investment

India | Mining | Tue Jan 01, 2013

BMI View : We expect a swathe of Indian companies to venture overseas in the pursuit of copper, coal and iron ore as the economy experiences rapid growth and regulation restricts domestic investment opportunities. We expect Africa to become the key destination for Indian mineral sector investment as the continent is rich in high-grade untapped reserves that India will need as the economy grows.

In line with our expectations, chronic power shortages and adomestic shortfall in coal productioncombined with significant regulationhaveencouraged an increasing number of Indiancompanies toventure abroadin search of mining opportunities.Companies such as Coal India Limited (CIL), Vedanta Resources and Tata Power have continued to hunt for investment opportunities in other countries as they seek to plug thegrowingdeficienciesofkey minerals, most notably coal, copper, tin andiron ore.State-runCILhas recently proposed the signing of a memorandum of understanding with the South African government in a bid to establish a wholly-owned subsidiaryfor the development of coal mines. Despiteholding the largest extractable coal reserves in the world, at approximately 22bnt (billion tonnes), the company has struggled toboost output due to failure in obtaining the necessary environment and regulatory clearances.

Uncomfortable Reading

India - Coal Production, Consumption & Balance (mnt)

Mounting Shortages As Imports Become Increasingly Threatened

Coal consumption in India has continued to outstrip production over the past decade,to reach a deficit of 137mnt (million tonnes)in 2011. We expect the growing shortfall in coal output to persist over the coming years and do not envisage a return to surplusanytime soon.Although the country has turned toimportsto supportitsdomestic consumption needs,we highlight thatrecent policies implemented inAustralia andIndonesia, which together account for almost 70% of India's imported coal,is a genuine cause for concern.The former's imposition of carbon taxes could discourage investment while the latter threatens to ban exports of low grade coal as of 2014.

Treading On Thin Ice

India - Coal Imports (mnt) & Growth

Reforms On The Cards, But Still A Parlous Outlook

Whilst India's coal industry possesses immense potential for considerable development, we believe the pervasiveness of corruption and significant bureaucratic hurdles will continue to curtail production and prevent miners from achieving full output. Despite the potential passage of the 2011 Mines and Mineral Development and Regulation (MMDR) Bill, which seeks to improve transparency and introduce better legislative environment for attracting investment, we remain wary of calling for a sea change in the country's mining industry.The government's newfound resolve on reform is beholden to the fickle support among members of the government. In May, Chief Minister Naveen Patnaik voiced his opposition against the passing of MMDR, citing the bill as a violation to the federal structure of the constitution with the transfer of supervising functions from the state government to the Indian Bureau of Mines (IBM) union.

Self-Reliant, For Now

India - % Of Global Production & Consumption (2011)

India currently has relatively little investment in Africa's mining sector with Vedanta's operations in Zambia and Namibia as well as Tata Steel's minesinMozambique some of the only notable exceptions. Compared with the presence of Western, Russian or Chinese companies'reach across Africa's mineral reserves India is far behind, perhaps on a par with where Chinese companies were around 15 years ago. Much of the reason for this has been that India is relatively self sufficient in the production and consumption of minerals. However, we expect India to become a much larger consumer of key metals over the coming years as GDP growth average 6.6% over the next decade. Given the regulatory issues highlighted above, we expect Indian companies to increasingly look abroadforminerals, most notably iron ore, copper and coal, demand of which will substantially increase as India industrialises.

It is worth noting that Indianmineralinvestmentto datehasgenerallynot followed the same pattern asthat byChina. Chinese investment in Africa's mining sector has typically been accompanied by high-level politicians and political deals as well as substantial infrastructure projects. Indian investment has followed a more Western approach with little political involvement or high profile developments in infrastructure or the construction ofprestige projects.

Production Will Struggle to Meet Growth

India - Mined Production Forecast Growth, % y-o-y

Southern & Western Africa To Attract Investment

We expect southern Africa to receive much of the interest from Indian companies seeking to plug India's shortfall in coal and copper. Mozambique has some of the largest coal reserves due to come online in the next few years and Botswana and Zambia have world-leading undeveloped resources of coal and copper. Furthermore, with the development of the ports of Durban and Beira, the region will have substantial capacity to export coal direct to India. We also expect West Africa to receive substantial interest given the size of the region's high grade reserves and our forecast for Indian steel consumption to average 6.8% over the next five years, whereas domestic iron ore production will grow at 5.1% over the same period.

One final areathatIndia will look to Africa for investment is uranium. India is looking to significantly increase nuclear power generation and thus with stringent domestic regulation, the country will look to invest in Namibia and Niger, which contain some of the largest uranium reserves in the world.

Table: India - Select Overseas Mining Investment

Source: BMI, Company Reports

Company

Country

Commodity

Details

Coal India

Mozambique

Coal

Planning to invest US$400mn to develop two coal exploration blocks granted by the Mozambican government.

Coal India

South Africa

Coal

Proposing a memorandum of understanding with the South African government to establish a wholly-owned subsidiary for locating and developing coal mines.

Essar Minerals

India, North America, South America

Iron ore, Coal, Manganese

Undertaking exploration and development of minerals.

Essar Minerals

Mozambique

Coal

Focusing on the exploration and geological mapping of five coal blocks in the provinces of Niassa and Tete.

Jindal South West Energy

South Africa

Coal

Bought 70% of South African company Indian Ocean Mining.

Jindal Steel & Power

Mozambique

Coal

Was awarded a 25-year licence to explore and mine coal in Tete province.